Tags: wall street | pain | fears | mideast

Defense, Energy Stocks Gain as Banks, Tech Slip on War Fears

Defense, Energy Stocks Gain as Banks, Tech Slip on War Fears
(Dollar Photo Club)

Friday, 03 January 2020 07:15 PM

Analysts warned that the killing of a key Iranian military leader in a U.S. airstrike in Iraq ordered by President Donald Trump will lead to further military escalation and likely continue to rattle equities markets.

Wall Street's major indexes fell from record highs on Friday. Friday's decline put the benchmark S&P 500 in the red for the week, snapping a five-week winning streak for the index.

Shares of defense companies rallied as Citi said Democrats may not be able to make a case against more military spending as conflict in the Middle East ratchets up.

“Middle East tension could change the 2020 defense conversation,” potentially lifting a “sentiment overhang” for equities, analyst Jonathan Raviv wrote in a note. “As is always the unfortunate case, defense stocks tend to benefit from perceptions of heightened risk and the potential for geopolitical conflict,” he said.

On Thursday, a U.S. airstrike in Iraq ordered by President Donald Trump killed a key Iranian military leader, Qassem Soleimani, rattling global markets.

In Friday morning trading, the S&P 500 Aerospace & Defense Index rose as much as 1.5% to the highest intraday since Nov. 27.

Top gainers included Northrop Grumman Corp., up as much as 5.6%, the most since July; Lockheed Martin Corp., higher by as much as 3.9% to a record high; Raytheon Co., which gained as much as 2.5%, also to a record, and L3Harris Technologies Inc., which climbed as much as 3.7%.

In December, Buckingham analyst Richard Safran said U.S. defense stocks may again outperform in 2020 as the group typically does well in an election year, largely due to a “flight to safety trade.” His favorites were Lockheed Martin, Northrop Grumman and L3Harris.

Energy companies, including Concho Resources Inc. and Occidental Petroleum Corp., also rallied. 

Big banks including bellwethers JPMorgan Chase & Co. and Bank of America Corp. slid while airlines like American Airlines Group and United Airlines Holdings dropped.

Here’s a sample of some of the latest commentary:

Height Capital Markets, Clayton Allen

Allen urged investors to “frame this event not as another one-off military action that will fade from the news cycle, but as a significant event in the U.S.-Iranian relationship that will alter the Middle East substantially.”

The strike “increases the risk of military escalation in the region without an obvious off-ramp,” Allen wrote. Iran may respond “along the lines of last summer’s tanker and oil facility attacks,” while any prospect of sanctions reductions may be over.

Cowen, Roman Schweizer

The strike is a “major escalation” and may “set off a chain of retaliatory strikes on U.S. personnel and assets across the Middle East and globally,” Schweizer wrote in a note. “Iran must respond given its status in the region,” he added, while other antagonists in Europe and Asia may “use this as an opportunity to create mischief or take overt action.” The U.S. will probably increase force deployments in the Mideast.

That means spending on “overseas contingency operations,” which had been on a “lower trajectory” over the next several years, probably won’t come down now, he said. Schweizer also sees a likely impact on election year domestic politics.

Vital Knowledge, Adam Crisafulli

“For the last several years, geopolitics has tended to have only an ephemeral effect on sentiment BUT the fallout will be greater this time,” Crisafulli wrote. That’s because “this is arguably the most significant foreign policy/geopolitical event thus far of the Trump presidency and risks sparking a much broader conflagration in the region.” And the S&P 500 “multiple at 18.5-19x leaves very little room for error and makes stocks much more vulnerable to macro headwinds.”

AGF Investments, Greg Valliere

“A violent escalation of hostilities between the U.S. and Iran is nearly certain in the coming days,” Valliere wrote in a note. That will be a “game changer that will obscure everything else -- impeachment, the Iowa caucuses, the stock market rally, etc.”

“There’s a reason, finally, for caution in the stock market,” Valliere said. “Global oil markets will be volatile for weeks to come,” he said, adding that “even more U.S. defense spending is certain.”

RBC, Helima Croft, head of global commodity

“Soleimani’s killing marks the most dramatic escalation in the standoff that has been raging since May and we believe will likely lead to reprisal attacks on US personnel and interests in the region,” Croft wrote.

“In terms of energy implications, we believe it would be unwise to discount Iran’s multiple disruptive capabilities after the September 14 drone and cruise missile attacks on Abqaiq and Khurais that temporarily took half of Saudi Arabia’s oil facilities offline,” she said. U.S. oil companies’ operations, especially in Iraq, look vulnerable, Croft said, noting “there have already been close calls over the summer with rockets landing near Exxon Mobil Corp. facilities.” Exxon shares fell about 0.4% in early Friday trading.

Here’s a sample of sector-specific commentary:

Defense

Citi, Jonathan Raviv

Defense stocks may gain as Democrats may not be able to make a case against more defense spending as conflict in the Middle East ratchets up, Raviv wrote. “Middle East tension could change the 2020 defense conversation,” potentially lifting a “defense sentiment overhang” for equities, he said. “As is always the unfortunate case, defense stocks tend to benefit from perceptions of heightened risk and the potential for geopolitical conflict,” he said.

Financials

KBW, Brian Gardner

KBW expects a risk-off trade with financials likely to underperform, Gardner wrote in a note. At the same time, “market volatility may help the exchanges to outperform,” and energy-sensitive bank stocks may also outperform.

Universal banks are likely at risk given their recent outperformance versus small- and mid-cap banks, Gardner said. He listed the highest-beta financials stocks with market caps of more than $1 billion: Square Inc., Brighthouse Financial Inc., SVB Financial Group, Ameriprise Financial Inc., PayPal Holdings Inc., Lincoln National Corp., Mastercard Inc., KKR & Co., Evercore Inc., and E*Trade Financial Corp.

Tech

Wedbush, Daniel Ives

Markets are showing a “risk off moment,” with tech stocks dropping “in fear of a broader escalation,” Ives wrote. The FAANG group is in focus on concern “this gut punch to the markets will stop the upward momentum in tech stocks in the near term,” he said.

“It’s a complicated question, but ultimately we continue to believe the scarcity of growth assets in the world keeps leading us to a unique combination of transformational secular growth trends in the tech space for 2020 that will drive stocks/valuations higher.” Ives advised buying his “favorite secular growth plays for cloud (Microsoft), 5G (Apple), healthcare cloud (Nuance) and cyber security (CyberArk, Fortinet, Varonis, SailPoint, Zscaler).”

Energy

Energy stocks gained along with oil prices, with an exchange traded fund tracking exploration and production companies rising as much as 3.4% to its highest intraday price since September.

Chemicals, Fertilizers

Bloomberg Intelligence, Jason Miner

“Any trend toward more expensive oil would tilt cost advantages back toward chemical companies with access to more-stable feedstocks. Gas-based nitrogen or ethylene plants in the U.S., even China’s coal-based petrochemicals, could be aided.”

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Analysts warned that the killing of a key Iranian military leader in a U.S. airstrike in Iraq ordered by President Donald Trump will lead to further military escalation and likely continue to rattle equities markets.
wall street, pain, fears, mideast
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2020-15-03
Friday, 03 January 2020 07:15 PM
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